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The Poor Man’s Covered Call (PMCC): Generating Income with Less Capital
The Poor Man’s Covered Call (PMCC): Generating Income with Less Capital
CORE INSIGHTS
- Stock Replacement: Instead of buying 100 shares ($10,000), you buy a deep-in-the-money LEAPS call ($2,500). This mimics stock ownership at a fraction of the cost.
- Diagonal Spread: You buy a Long-Term Call (LEAPS) and sell a Short-Term Call against it. The short call pays you premium, lowering your cost basis.
- Leveraged ROI: Because your cost is lower, the ROI from the premium is much higher (e.g., 2% monthly vs 0.5%). It’s capital efficiency at its best.
The standard Covered Call is safe but expensive. The Poor Man’s Covered Call (PMCC) is the “hacker’s alternative.” By using a LEAPS option as a proxy for the stock, you can run the same income engine with 75% less capital.
What-If Scenario: Trading SPY ($400/share)
| Strategy | Capital Required | Monthly Income ($300) | ROI |
|---|---|---|---|
| Stock (100 Shares) | $40,000 | $300 | 0.75% |
| PMCC (LEAPS) | $8,000 | $300 | 3.75% (5x ROI) |
Visualizing Capital Efficiency
*Figure 1: Leverage Effect. The PMCC (Green) requires far less capital to generate the same income stream.*
Strategic Action Steps
1
Buy the LEAPS (Deep ITM)
Choose an expiration 12+ months out. Pick a strike with Delta > 0.80. This acts as your “Stock.”
Choose an expiration 12+ months out. Pick a strike with Delta > 0.80. This acts as your “Stock.”
2
Sell the Call (OTM)
Sell a call expiring in 30-45 days. Strike price must be higher than your break-even cost to avoid locking in a loss.
Sell a call expiring in 30-45 days. Strike price must be higher than your break-even cost to avoid locking in a loss.
3
Manage the Spread
If the stock crashes, your LEAPS drops faster than stock. Be ready to close or roll the short call to defend the position.
If the stock crashes, your LEAPS drops faster than stock. Be ready to close or roll the short call to defend the position.
The Bottom Line: Who Should Choose What?
- Choose PMCC: Active traders with smaller accounts ($10k-$50k) who want monthly income and understand leverage.
- Choose Standard CC: Conservative investors with large portfolios ($500k+) who prioritize capital preservation.
Frequently Asked Questions
What is a PMCC?
A strategy using a long-term LEAPS option to replace stock ownership, allowing you to sell covered calls with less capital.
Why use LEAPS instead of stock?
Capital Efficiency. A LEAPS call costs a fraction of the stock price but mimics its movement, boosting ROI.
What is the risk?
Leverage. If the stock crashes, the LEAPS can lose 100% of its value. Also, options expire, unlike stock.
Disclaimer: This content is for informational purposes only. Options involve risk. Consult a financial advisor.